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EXPLORING BUSINESS V. 2.1 By Karen Collins

CHAPTER 14 PERSONAL FINANCES

CHAPTER OBJECTIVES Explain how to build a good credit rating. Understand the cost of borrowing. Explain the financial planning life cycle. Discuss the advantages of a college education and understand the ways to finance a degree. Describe the steps to take to get a job.

CHAPTER OBJECTIVES Explain compound interest and the time value of money. Discuss the value of getting an early start saving. Explain how to prepare a net worth statement, personal cash flow statement and a personal budget. Discuss the advantages and risks of buying a home.

PERSONAL FINANCE APPLICATION OF PRINCIPLES OF FINANCE TO THE MONETARY DECISIONS FOR YOUR INDIVIDUAL BENEFIT OR FAMILY

FINANCIAL PLANNING THE ON-GOING PROCESS OF MANAGING YOUR PERSONAL FINANCES TO MEET GOALS THAT YOU’VE SET FOR YOURSELF OR YOUR FAMILY

QUESTIONS FOR FINANCIAL PLANNING Annual Income? Debt and payments? Value of assets? Annual budget? Wealth accumulation? Money for retirement?

FINANCIAL PLANNING LIFE CYCLE

EDUCATION AND AVERAGE INCOME EDUCATION LEVELAVERAGE INCOME High school dropout$20,873 High school diploma$31,071 College degree$56,788 Advanced degree$82,320

FUNDING SOURCES FOR COLLEGE EDUCATION Scholarships Grants Education Loans Work-Study

STEPS TO GETTING A JOB OFFER Resume Cover letter Create company list General search Interview

EVALUATING A JOB OFFER Salary Opportunity Quality of Life Benefits –Health Insurance –Disability Insurance –Flexible Spending Account –Retirement Plan

COMPOUND INTEREST REFERS TO THE EFFECT OF EARNING INTEREST ON YOUR INTEREST

TIME VALUE OF MONEY A DOLLAR RECEIVED IN THE PRESENT IS WORTH MORE THAN A DOLLAR RECEIVED IN THE FUTURE

STEPS IN FINANCIAL PLANNING Evaluate Current Financial Status. Set Financial Goals. Use a budget to plan and assess your financial performance by comparing budgeted figures with actual amounts.

PERSONAL FINANCIAL STATEMENTS Personal Net Worth Statement Cash Flow Statement

PERSONAL NET WORTH STATEMENT (ASSETS) ASSETVALUE Cash$200 Checking accounts$1,000 Savings accounts/CDs/Money Market Accounts $400 Cars$8,000 Furniture and appliances$1,500 Computers$900 Stereo/Video Equipment/Cell Phones$400 Clothing$300 Total Assets$12,700

PERSONAL NET WORTH STATEMENT (LIABILITIES) LIABILITYVALUE Credit card balances$1,200 Charge account balances$200 Student loans$7,000 Car loans$2,300 Total Liabilities$10,700 Total Net Worth = Assets – Liabilities$12,700 - $10,700 Total Net Worth$2,000

CASH FLOW STATEMENT INFLOW/OUTFLOWVALUE ($) Cash Inflows Wages18,700 Student loan7,000 Total inflow of cash27,000 Cash Outflows Housing Rent5,400 Utilities700 Communication900 Food Groceries2,300 Eating out1,200

CASH FLOW STATEMENT INFLOW/OUTFLOWVALUE ($) Transportation Gas and maintenance1,400 Car and loan payments1,400 Personal and healthcare Medical co-payments and dental200 Clothing200 Laundry/cleaning supplies/misc.100 Savings1,200 Other expenses800 Total outflow of cash15,800

FINANCIAL GOALS Short-Term Intermediate-Term Long-Term

WELL-CONCEIVED GOALS Realistic Measurable Definite Time Frames Specific Courses of Action

JOE’S FINANCIAL GOALS SHORT-TERM GOALS (LESS THAN 2 YEARS) Pay off car loan Pay off credit card and charge account debt INTERMEDIATE-TERM GOALS (2-5 YEARS) Complete college Take one-month vacation after completing college LONG-TERM GOALS (MORE THAN 5 YEARS) Pay off student loans Buy a home Save for retirement

BUDGET ITEMBUDGET ($)ACTUAL ($)VARIANCE (ACTUAL VS. BUDGETED) ($) Cash inflow Wages18,70019, unfavorable Student loan7, Total25,70026, unfavorable Cash Outflow Housing Rent5, Utilities unfavorable Communication Food Groceries2,3002, favorable Eating out1,2001, unfavorable

BUDGET ITEMBUDGET ($)ACTUAL ($)VARIANCE (ACTUAL VS. BUDGETED) ($) Transportation Gas and maintenance1,3001, unfavorable Car loan payments Personal and healthcare unfavorable Recreation/entertainment1,1001, unfavorable Education6, Insurance1, Savings1, Other expenses favorable Total24,10024, unfavorable Surplus (deficit)1,6001, unfavorable

DEVELOP BUDGET AND EVALUATE PERFORMANCE Wages Student loan Pay off credit cards Actual v. Budget- Variance Mature goals

THREE LEVEL GOALS AND PLANS Primary goal: financial independence Secondary goals: Certain standard of living, college education for children, comfortable retirement lifestyle Tertiary goals: Housing, food, transportation, personal and health care, recreation/entertainment, education, insurance, savings

U.S. SAVINGS RATE

RISKY MORTGAGES Subprime: made to borrowers who don’t qualify for market-set interest rates. Adjustable Rate Mortgages (ARM): pegged to increase or decrease of certain interest rates.

THE MELTDOWN Housing prices started to go down in 2006 and Homeowners with subprime ARM loans were not able to refinance, and foreclosures became commonplace. Because of the mortgage-loan defaults, banks lost huge amounts of money. These costs carried over the Fannie Mae and Freddie Mack (government-sponsored organizations who make and back mortgage loans). Major investment firms that had been buying subprime mortgages took a big hit. Getting loans became very difficult and many lost their homes.

LESSONS OF SUBPRIME CRISIS All mortgages are not created equal –Avoid ARM’s; you are better off with a fixed-rate loan. Risk in the marketplace –Management risk –Business risk –Financial Risk Not all income is equally disposable –Watch how much you borrow; your home is not a piggy-bank.